a cloud inventory management solution from fishbowl

What Is the Difference Between 3PL and 4PL Services?

3pl vs 4pl

Employing the correct inventory management method can increase efficiency in ordering and storing products. However, if you are not regulating your logistics and properly transporting your products to customers, your inventory management efforts may become derailed.

Too often, a business will fall prey to some of the most common supply chain logistics problems, such as over and understocking, or the inability to maintain cost control. Knowing the following levels of logistical structures, and which one best suits your operational needs, can reduce costs and keep a small to medium-sized business’s entire supply chain running smoothly.

3pl vs 4pl

What Types of Logistics Are There?

Business owners and operators need to understand the significance of logistical planning and distribution operations, as well as the levels of logistics that can be employed. These levels range from 1PL, in which a business may act as their own logistics provider, to 5PL, in which they employ a logistics provider to handle these services for them.

For any of these logistics structures, a company will still need to manage their inventory through multiple channels and across multiple locations. Nevertheless, choosing the correct logistical structure to match your business goals can make managing your inventory much more straightforward.

What Is 1PL?

A first-party logistics (1PL) provider is essentially the business itself. 1PL models may appeal to many small businesses, as the company — or the business owner — will handle the sending and receiving of products by themselves. This structure may also prove beneficial to companies that want to control every supply chain process themselves. When handling logistical services in-house, there may not be a need for many employees to handle inventory management. Businesses can certainly get by using free inventory management software for up to 5 users since inventory management will be done on a smaller scale, with few people overseeing operations.

Enterprises that may consider a 1PL model include importer/exporters, manufacturers, retailers, and wholesalers. These can also include individuals and their small businesses. 1PL allows a company to choose their packaging details and to maintain quality control, since they handle everything alone. This means, however, that they will be solely responsible for every step of the fulfillment process. An example of an individual applying 1PL may be an Etsy shop owner who makes jewelry, packages it, and takes it to the post office to send to customers directly.

What Is 2PL?

Second-party logistics (2PL) is concerned with carriers and transporting services. Using the 2PL model, a business might hire a carrier or warehouse manager for transportation to distribute their goods. This service provider may employ planes, boats, and trucking companies. Many businesses, from small to large, choose this as a viable option for their operations.

To continue with the jewelry example above, the same individual might have grown their company and have chosen to hire a trucking company to deliver products to the post office for shipping.

What Is 3PL?

Third-party logistics (3PL) providers help other businesses who have outsourced or subcontracted for several different logistical services. 3PL models are typically used by medium- to large-sized businesses for transporting large quantities of goods spanning extensive geographical areas.

Since 3PL providers are a separate entity from the business producing the goods, they can focus on optimization, warehousing, transportation, order fulfillment, and contract management for the companies they serve. The jewelry/apparel business example may have grown even further and is now wanting to expand operations to other cities. With a third-party service provider, they may rely on the 3PL model for packaging, storing, and transporting their products.

What Is 4PL?

Fourth-party logistics (4PL) companies are mainly concerned with running a business’s supply chain operations. 4PL providers, or lead logistics providers, will take over a more managerial role in the supply chain. Similar to the 3PL service model, the lead logistics provider will be outsourced — however, a 4PL provider will oversee all of the company’s supply chain operations and often rely on a 3PL provider for fulfilling duties.

A 4PL provider will have its own technologies and resources to help it understand how the logistics of a business can be better served. A lead logistics provider may run the numbers and set long-term goals for the jewelry and apparel business above, advising them to ramp up production to meet these objectives.

What Is 5PL?

Fifth-party logistics (5PL) providers often manage multiple clients, work through supply networks, and may even control production. The concept of 5PL is newer than the previous models mentioned on this list and, as such, is less common. 5PL options are used by e-commerce businesses to facilitate supply networks rather than supply chains. A 5PL provider will negotiate transportation prices with transportation companies. 5PL services are non-asset based, making it easier for them to work across every discipline.

Key Differences Between 3PL and 4PL Services

The similarities between 3PL and 4PL services are enough to confuse businesses as to which one might be right for their logistical needs. Mainly, these two logistical services differ in what areas they are specialized for, as well as the amount of oversight a business is willing to give up.

3PL providers specialize in services, such as warehousing, transportation, inventory management, operations integrations, and packaging. A 4PL provider, on the other hand, may specialize their services for more administrative duties, such as procurement and distribution, with the end goal of maximizing cost-effectiveness for clients throughout the supply chain.

When considering whether or not a business will go with a 3PL or 4PL model, there are a few questions to answer. Consider how much control you are willing to maintain over logistical operations, what level of labor you are willing to put into your supply chain, and what logistical objectives your business is striving to achieve.

How Logistics Benefits Businesses

Efficient logistics are an essential factor when accounting for supply chain operations. Logistical services can better optimize functions, while an inventory management solution that can track inventory quantities and other data at different locations can reduce costs and increase inventory control.

Some logistics models may be insufficient for a bigger business and their transportation speeds may be bogged down. If a smaller business chooses a more expansive logistics provider, they may be paying for more than they need. The correct logistics model can expedite a business’s transportation of goods and increase efficiency across the supply chain while maintaining cost efficiency.